[A-List] ECONOMICS OF OIL

["Mark Jones" <markjones011@xxxxxxxxxxxxx>]

New York Times Magazine
November 11, 2002
ECONOMICS OF OIL
Where the Oil Is
By NOAM SCHEIBER

There have been few more encouraging developments in the war on terror than
a statement Vladimir Putin made in Germany about six weeks ago. ''In case
of regional conflicts breaking out, Russia is prepared to supply more
oil,'' the Russian president announced. ''And I say this loud and clear.''

Today the United States imports roughly half the oil it uses, and one
quarter of its total imports comes from the Persian Gulf. It goes without
saying that easing our dependency on Middle Eastern oil producers could
greatly simplify our foreign policy. The question is whether it's possible.

At first glance the signs are encouraging. Russia now produces seven
million barrels of oil per day, second in the world only to Saudi Arabia.
The Caspian republics to its south -- mainly Kazakhstan and Azerbaijan --
already produce two million barrels per day and have at various points been
hailed as the ''next Persian Gulf.'' Together the three former Soviet
states could be producing 13 million barrels per day by 2010. Elsewhere,
capacity in Latin America is expected to grow by three million barrels per
day over the next decade -- as much as the United States currently imports
from any one country. And technological advances are making it
cost-effective to extract oil off the coast of West Africa and the Gulf
Coast of the United States and to refine oil in Canada and Venezuela that
was until recently unusable. West African production alone could rise by
from 4.3 million to 6.8 million barrels per day over the next 10 years.

But the optimism quickly fades upon closer examination. For starters, much
of the newly extracted oil will simply replace declining output from
existing fields. Norway is now the second-largest non-OPEC exporter of oil
in the world, but earlier this year its oil ministry announced that the
country's oil production had begun to decline, a drop-off that will reach 5
percent by 2005. Oil production in the United Kingdom, which currently
outstrips that of Iraq, hit its peak three years ago. Production in Mexico,
the fourth-largest supplier of oil to the United States (behind Canada,
Saudi Arabia and Venezuela), is poised to peak in the next five years. Many
analysts predict that overall non-OPEC production will begin to decline
some time this decade, even after all the new supply is brought online.

And even the sources of rising production aren't without problems. Much of
Russia's vast reserves lie in Siberia, where the country's primitive
pipeline infrastructure makes shipping a nightmare. Russia is currently
able to export less than half the oil it produces. But that still puts it
years ahead of its Caspian neighbors -- whose reserves most analysts
concede have been massively overhyped anyway. In Nigeria -- which today
accounts for 8 percent of oil imports to the United States and has the
proven reserves to produce one-third more oil by 2007 -- more than 20 raids
by militants depressed oil production by 5 percent in 2000. And Colombia,
once a top exporter to the United States, until very recently suffered such
frequent guerrilla attacks on its 500-mile oil pipeline -- five bombings a
day at the peak -- that it had to petition the United States for $100
million in ''counterinsurgency'' aid to keep a major oil company from
fleeing.

True, advances in drilling technology have made it financially feasible to
extract oil from ocean depths of 5,000 to 10,000 feet, opening up fields
off the coast of West Africa and Florida that would be more safely
insulated from sabotage. But extracting oil from deep in the ocean is still
much more expensive than extracting it from the ground. Most estimates
suggest Saudi oil could be profitably sold for between $2 and $5 per
barrel. By contrast, according to Steve Andrews, an independent energy
analyst, deepwater oil must fetch a price of $14 to $16 per barrel before
drilling becomes profitable. Likewise for oil extracted from tar sands in
Canada and certain areas in Venezuela; that oil is so heavy and viscous
that the refining costs were once prohibitive.

And yet the biggest obstacle to freeing ourselves from Middle Eastern oil
has nothing to do with politics or chemistry or engineering. It has to do
with an iron law of economics. Oil, after all, trades in a globalized
market. As such, its price is determined by the interaction of global
supply and global demand. And since any large producer can affect the oil
supply, any large producer can affect oil prices. Which is to say, as long
as the Persian Gulf states' 600 billion-plus barrels of proven reserves
(262 billion in Saudi Arabia alone) give them control over the vast
majority of the world's discovered oil -- and few now believe there are any
major oil ''provinces'' still waiting to be found -- no amount of help from
Vladimir Putin will solve our problem.